How the World’s Largest Asset Managers Are Finally Taking ESG Seriously

Amid a large uptick in environmental, social, and governance fund flows, asset managers are funneling resources into making sure their investments live up to their ESG promises. 

To do so, the top 50 asset managers — with $60 trillion in assets — are signing on to sustainability codes, publishing ESG papers and voting policies, and paying for rating providers, new research from shareholder advisory firm SquareWell Partners shows.  

“ESG investing can no longer be regarded as a nice-to-have or a niche matter,” the firm said in February report. “It has moved squarely into the mainstream, and is growing not just in equity markets, but in private markets and fixed income too.” 

Of the 50 managers included in the study, all but one, Charles Schwab Investment Management, have signed onto the United Nations Principles for Responsible Investment, according to Squarewell. The UN PRI, according to the report, is a “driving force” behind the integration of ESG factors into investment portfolios.  

There is some debate over the efficacy of the UN’s code. A study published in May by researchers at the Georgia Institute of Technology and Northwestern University said that active asset managers don’t show “meaningful improvements” in how they incorporate ESG factors into their investment strategies after signing onto the principles. 

Still, asset managers are increasingly taking steps to make changes, according to Squarewell. Thirty of the respondents said they have developed their own ESG ratings systems, the report showed.  

These firms have also taken it upon themselves to add to the growing conversation surrounding ESG. Thirty-four out of the 50 respondents said they publish papers on ESG topics, including climate change, human capital, biodiversity, among other topics, according to the report.  

They’re engaging with more viewpoints when it comes to ESG, too. Twenty of the responding firms said they use at least four ESG research and rating providers, the report showed. With these providers, there are often discrepancies in the data — one rating provider may give a company a high score, while another rates them poorly because of differing criteria, as Institutional Investor previously reported.  

[II Deep Dive: What Happens When a Company Gets an A From One ESG Rater and an F From Another?] 

One emerging area of interest for asset managers is tax policy, according to the report. Following the Global Reporting Initiative Tax Standard in December 2019, SquareWell said it expects interest in this subject area to grow.  

In the latest survey, just nine respondents said they had published dedicated insights on tax policy.

“The policies mostly deal with tax payment transparency,” Estelle Guichard, head of responsible investment research at SquareWell, said via email.  

She added that these policies are guided by the following principles: company tax arrangements are a board responsibility, country-by-country reporting is a major element of transparency, and taxes should be paid where economic value is generated.